Environmental Economics

DEFINITION of 'Environmental Economics '

Environmental economics is an area of economics that studies the financial impact of environmental policies. Environment economists perform studies to determine the theoretical or empirical effects of environmental policies on the economy. This field of economics helps users design appropriate environmental policies and analyze the effects and merits of existing or proposed policies.

BREAKING DOWN 'Environmental Economics '

The basic argument underpinning environmental economics is that there are environmental costs of economic growth that go unaccounted in the current market model. These negative externalities, like pollution and other kinds of environmental degradation, could then result in market failure. Environmental economists thus analyze the costs and benefits of specific economic policies, which also involves running theoretical tests or studies on possible economic consequences of environmental degradation.

Environmental Economic Strategies

Environmental economists are concerned with identifying specific problems to be rectified, but there can be many approaches to solving the same environmental problem. If a state is trying to impose a transition to clean energy, for example, they have several options. The government can impose a forcible limit on carbon emissions, or it can adopt more incentive-based solutions, like placing quantity-based taxes on carbon emissions or offering tax credits to companies that adopt renewable power sources. 

All of these strategies rely, to varying degrees, on state intervention in the market; therefore; the degree to which this is acceptable is an important political factor in determining environmental economic policy. This debate is also known as prescriptive (in which the government would manually control carbon emissions) versus market-based (where the government would set goals and place incentives but otherwise allow companies to meet those goals however they wanted.)

Environmental Economic Challenges

Environmental economics also requires a transnational approach. An environmental economist could identify aquatic depopulation, resulting from overfishing, as a negative externality to be addressed. The United States could impose regulations on its own fishing industry, but the problem wouldn't be solved without similar action from many other nations that also engage in overfishing. The global character of such environmental issues has led to the rise of non-governmental organizations (NGO's) like the International Panel on Climate Change (IPCC), which organizes annual forums for heads of state to negotiate international environmental policies. (See also: Preparing Your Portfolio for Climate Change.

In the United States, policy proposals stemming from environmental economics tend to cause contentious political debate. Leaders rarely agree about the degree of externalized environmental costs, making it difficult to craft substantive environmental policies. The Environmental Protection Agency (EPA) oversees a National Center for Environmental Economics, which emphasizes market-based solutions like cap and trade policies for carbon emissions. Their priority policy issues are encouraging biofuel use, analyzing the costs of climate change, and addressing waste and pollution problems.

RELATED TERMS
  1. Environmental Impact Statement

    A report addressing the potential effects on the environment ...
  2. Environmental Tariff

    A tax placed on products being imported to or exported from countries ...
  3. ISO 14000

    A set of rules and norms for environmental management of industrial ...
  4. Green collar

    A worker who is employed in an industry in the environmental ...
  5. Green Marketing

    Marketing products and services based on environmental factors ...
  6. Domini 400 Social Index

    A market cap weighted stock index of 400 publicly traded companies ...
Related Articles
  1. Investing

    For Companies, Green Is The New Black

    Sustainability and reducing environmental impact are hot corporate objectives. Find out why.
  2. Managing Wealth

    What Does It Mean To Be Green?

    Green investing is the new buzz word for companies and investors. Find out what it means.
  3. Markets

    Green Bonds: Fixed Returns To Fix The Planet

    Fixed-income investors are no longer left out of the green investing revolution.
  4. Managing Wealth

    Can Business Evolve In A Green World?

    Learn how global warming is starting to heat up America's corporate climate.
  5. Managing Wealth

    5 Financial Careers You Didn’t Know Existed

    Discover some often overlooked financial career opportunities, and learn how accountants can catch the bad guy or rub elbows with Hollywood's elite.
  6. Personal Finance

    Make Sure Your Business Complies with These 3 Environmental Laws

    Discover why 1970 is considered the year of the environment, and learn about several major environmental laws with which businesses must comply.
  7. Managing Wealth

    Go Green With Socially Responsible Investing

    Find out how morals and ethics can bring you a surprising return.
  8. Managing Wealth

    Save The Earth: Become A Capitalist

    Who says that capitalism and environmentalism have to be mutually exclusive?
  9. Managing Wealth

    The Top 4 Oil Companies That Protect the Environment (XOM, SUN)

    Read about some of the most environmentally conscious oil companies that have actual track records of investments in research and cleanup.
  10. Markets

    Is Infinite Economic Growth on a Finite Planet Possible?

    While the finite nature of Earth's resources limits the direction of economic growth, it does not mean that infinite economic growth is impossible.
RELATED FAQS
  1. How does government regulation impact the metals and mining sector?

    Learn how permit processes and regulations impact new mining projects. Discover how government bureaucracy and litigation ... Read Answer >>
  2. How do environmental regulations affect profitability in the chemicals sector?

    Learn how government regulation affects the chemicals sector, including its impact on employment, research and development, ... Read Answer >>
  3. What are green investments?

    Green investments are traditional investment vehicles (such as stocks, exchange-traded funds and mutual funds) in which the ... Read Answer >>
  4. What are some of the drawbacks of industrialization?

    Learn about the major drawbacks of industrialization, such as environmental damage, income inequality, overcrowding of cities, ... Read Answer >>
  5. What is a "socially responsible" mutual fund?

    As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments. Securities ... Read Answer >>
  6. What impact does government regulation have on the financial services sector?

    Learn about how the financial services industry is affected by government regulation, and the different types of regulations ... Read Answer >>
Hot Definitions
  1. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make ...
  2. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  3. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  4. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  5. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  6. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
Trading Center